Swiss lawmakers are signaling they may soften a key part of the government's plan to make UBS safer after the Credit Suisse collapse. A committee in the upper house of parliament has backed an alternative that would let the bank cover only half of the capital buffer for its foreign subsidiaries with common equity, using a bond-like layer known as AT1 to cover the rest.
The proposal comes from the Economic Affairs and Taxation Committee, which is reviewing the country's bank safeguards following the emergency rescue of Credit Suisse by UBS in 2023. The Swiss government had argued that UBS should hold around $20 billion more in common equity—called Common Equity Tier 1, or CET1—and fully back its foreign units with that high-quality capital, so that a future failure would be less likely to land on taxpayers.
What is CET1 and AT1?
Common Equity Tier 1 is the core measure of a bank's financial strength. It consists mainly of shareholder equity and retained earnings—money that is permanently available to absorb losses. Regulators require banks to hold a minimum amount of CET1 as a cushion against unexpected losses.
AT1, or Additional Tier 1, is a type of bond that banks issue to meet capital requirements. It sits between common equity and traditional debt. AT1 bonds can be written down or converted into equity if a bank's capital falls below a certain level, which makes them riskier than ordinary bonds but less risky than common stock. They typically pay higher interest to compensate for that risk.
The committee's idea is to let UBS cover half of the required buffer for its foreign units with CET1 and the other half with AT1. That would reduce the amount of new common equity UBS would need to raise, potentially saving the bank billions of dollars in capital costs.
Why this matters
The debate is part of a broader effort in Switzerland to tighten rules for systemically important banks after Credit Suisse's collapse exposed weaknesses in the country's financial oversight. UBS, now the country's only global bank, has become even more dominant after absorbing its rival, and regulators are keen to ensure it can withstand a future crisis without needing a taxpayer bailout.
UBS has argued that the government's plan to require full CET1 backing for foreign subsidiaries is excessive and would put it at a competitive disadvantage against global peers. The bank says it already holds strong capital levels and that the extra requirement would tie up money that could otherwise be used for lending or returned to shareholders.
Investors have been watching the capital debate closely because it directly affects how much money UBS can return to shareholders and how much it can invest in growth. A stricter rule could force the bank to retain more earnings, potentially slowing dividend growth or share buybacks. A lighter rule, as proposed by the committee, would give UBS more flexibility.
What it means for investors
For everyday investors, the key takeaway is that the outcome of this debate will influence UBS's profitability and its ability to reward shareholders. If the committee's proposal gains traction, UBS may not need to raise as much new equity as the government wanted, which could be positive for the stock. However, the final decision is far from settled—the full parliament and the government still have a say.
It's also worth noting that AT1 bonds carry real risks. While they help banks meet capital requirements, they are designed to absorb losses in a crisis, which means investors in those bonds could lose money if the bank gets into trouble. The 2023 Credit Suisse rescue, where AT1 bonds were written down to zero, is a stark reminder of that risk.
Swiss stocks have been in focus recently, with tensions in the Middle East and a busy economic calendar weighing on sentiment. The capital rule debate is one of several factors that could move UBS shares in the coming months.
For now, the committee's proposal is a signal that lawmakers are willing to consider a more balanced approach than the government's original plan. But investors should expect continued back-and-forth as the details are negotiated.
UBS is not the only bank facing capital questions. In the US, big banks are divided over the Federal Reserve's plan to rework the surcharge for globally systemically important banks, a similar debate about how much capital is enough.
The Swiss parliament is expected to debate the committee's proposal in the coming weeks. The final rules will likely shape UBS's capital strategy for years to come.
